What The Flows Show: Investors Preparing For Fiscal Cliff

Dodd Kittsley:Under the shadow of the looming fiscal cliff, exchange traded product (ETP) flows continued at a record-setting pace through November, with $25bn for the month and $218.9bn for the year. The previous record of $208bn was set in November 2008 as the earlier stages of the global financial crisis unfolded.

Fixed income remained a key differentiator for the year, inching closer to record setting territory with $67.8bn of flows year-to-date, well ahead of the $50bn collected in 2011. While all segments of the ETP fixed income market have grown, this year’s flows have been focused in categories like investment grade corporates, high yield and emerging markets – essentially, the higher yielding segments of the bond market.

In the months leading up to November’s election, we saw bond ETF investors flock to these riskier, higher income sectors of the market. However, flows quickly shifted just ahead of the election as it became apparent that neither political party would emerge with enough strength to immediately avert the fiscal cliff. Investors concerned about higher taxes and spending cuts turned to Treasury bond ETPs, which absorbed $2.7bn in November with over $1.6bn of that coming in during the three days that preceded the election (see below).

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Meanwhile, high yield bond ETPs saw redemptions of $0.04bn for the month, a modest amount compared to the $13bn the category has brought in YTD. Despite this lull, other high yielding products with less perceived risk continued to see inflows – areas like bank loans, short duration high yield and emerging market bond ETPs.

So while flows in November were a bit of a mixed bag, one thing remained clear: investors continue to look to ETPs to provide the flexibility they need to make tactical portfolio changes in uncertain times. And with what lies ahead, we can only expect this trend to continue.

Dodd Kittsley, CFA, Director, is Head of Global ETP Market Trends Research for BlackRock. BlackRock’s ETP research team provides insights and perspectives on the global ETP marketplace delivered through the monthly ETP Landscape and other regular and customized research. Mr. Kittsley was previously Head of Due Diligence for iShares, a global provider of ETPs. Mr. Kittsley’s service with the firm dates back to 2007, including his years at Barclays Global Investors (BGI), which merged with BlackRock in 2009. At BGI, he was responsible for providing customized portfolio solutions and product analytics to financial intermediaries. Dodd was a Director of Sales Strategy at BGI, leading a team that created and delivered ETP product and industry related insights. Prior to joining BlackRock, Mr. Kittsley held research and fund due diligence positions at State Street Global Advisors and Morgan Stanley. He has published extensively and is a frequent speaker at industry conferences and in the media. Mr. Kittsley earned a B.A. degree from the Hamilton College and a Masters degree from University of Houston. He holds various U.S. securities licenses. He received the Chartered Financial Analyst (CFA®) designation, is a member of CFA® Institute.